Revamping Fairness: Pros and Cons of Progressive Consumption Tax

The concept of progressive consumption taxation, where taxes are based on spending rather than earnings, could revamp economic growth by encouraging saving during high-earning years. This approach could bolster investment, raise productivity, and enhance financial security for low-income households, providing a fair and efficient alternative to income taxation.

Glasgow, Dec 27 (The Conversation) — The debate on tax fairness typically centers on income, scrutinizing the earnings of the wealthy, appropriate taxation levels, and safeguards for low earners. However, an alternative model is gaining traction: progressive consumption taxation, which taxes individuals based on spending rather than income.

This approach, according to research co-authored by Carlos da Costa, can significantly impact economic growth. Unlike income taxes that deter productivity by raising marginal rates, a consumption-based system incentivizes saving and injects funds into business investments, thereby boosting productivity and wages over time.

Addressing concerns on regressive implications, the research highlights that a consumption tax can redistribute wealth akin to income tax without growth impediments. The system leverages existing social security data to average incomes over several years, facilitating a fair and efficient tax system without requiring additional bureaucracy.

(With inputs from agencies.)